RICS Americas Property World Fall 2009

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RICS Americas Property World Fall 2009

  1. 1. 2009 | FALL EDITION | RICSAMERICAS.ORG PROPERTY AN INFORMATION RESOURCE FOR RICS MEMBERS AROUND THE GLOBE ARE WE THERE YET? COMMERCIAL REAL ESTATE’S LONG ROAD TO RECOVERY. MEXICO IN TIME OF CRISIS CANADA’S REAL ESTATE MARKETS TOWN PLANNING IN ITALY RICS-PWFall09.indd 1 11/5/09 2:43 PM
  2. 2. Contents Contacts Publishing and advertising managed by: RICS Americas propertyworld@rics.org 5 Are We There Yet? Editorial Board: Marc Louargand, FRICS Tony Grant, FRICS Simon Taylor, FRICS Matt Bruck, RICS Americas Managing Director 9 Toward Sustainable Finance: Readers: James Arrow, MRICS The Trouble with Asset Values Don Dorchester, FRICS Dennis Webb, FRICS Maureen Ehrenberg, FRICS Alistair Lamb, MRICS Clive Lowe, FRICS M. Barden Prisant, FRICS 12 Site Specific Art: Where Real Estate Executive Editor: Steve Wolfe, RICS Americas and the Art World Intersect Director of Operations Beverly Schreiber Jacoby, FRICS Managing Editor: Will Safer, RICS Americas Communications Associate Designed by: 15 Ten Principles for Sustainable Aaron Mickelson Printed by: Property Underwriting & Valuation Earth Enterprise Scott Muldavin, FRICS Published by: RICS Americas 60 East 42nd Street Suite 2918 19 Canada’s Real Estate Markets New York, NY 10165 T +1 212 847 7400 Sheila Botting, FRICS www.ricsamericas.org 22 Mexico in Time of Crisis Oscar J. Franck Terrazas, MRICS 25 The Challenge of Real Estate Investment In Italy Marzia Morena, MRICS While every reasonable effort has been made to ensure the accuracy of all content in the journal, RICS will have no 27 The Value of Continuous responsibility for any errors or omissions in the content. The views expressed in the journal are not necessarily those of RICS. Program Assessment RICS cannot accept any liability for any Alexia Nalewaik, MRICS loss or damage suffered by any person as a result of the content and the opinions expressed in the journal, or by any person acting or refraining to act as a result of the material included in the journal. 29 Concern in the Caribbean: All rights in the journal, including copyright, content and design, Strategies for Surviving are owned by RICS, except where otherwise described. the Economic Crisis Steve Rajpatty, MRICS front cover © Katja Wickert RICS members receive RICS Property World | Fall 2009 3 50% off job listings RICS-PWFall09.indd 2-3 11/5/09 2:43 PM
  3. 3. Enter the World Economic Overview of Caribbean Construction Are We There Yet? Marc Louargand, FRICS, cautions that even while the rest of the economy appears to CCD is the must-have trade journal for be recovering, the commercial real estate market will likely lag behind. the global construction professional Caribbean Construction Digest (CCD) is a new trade journal geared towards “redefining the built environment” within the Caribbean. CCD provides news, information, discussions and debates on issues impacting on the Caribbean’s unique construction industry, as well as articles and interviews on people, © Yanik Chauvin programs and projects of importance to various stakeholders. CCD is a reliable source of Caribbean construction highlights for the academic, A s we exit the middle of 2009 we are still countries are expected to have positive growth contending with a global recession that has although at lower rates than in past years. professional, investor and contractor. had a negative impact on property markets. The outlook for the near term is not better. Given In the United States, the signs are still mixed but the lagging nature of property market responses many economists are calling for a positive GDP change in the third or fourth quarter of 2009. Articles by respected professionals to the broader economy, things will probably get worse before they get better. What will it There are a few positive signs in leading industries. from around the world take for things to turn around? Where are we The Book-to-Bill Ratio in Semiconductors rose going in terms of occupancies, rents and values? to .74 in May compared to .47 in January. The Special reports and technical What forces will combine to shape the fortunes Book-to-Bill ratio compares current sales (Book) information of the property market for the next few years? to shipments (Bill). When the ratio is at or above 1.0 it signifies a healthy electronics market. By The Global Recession comparison, the May 2008 ratio was .86. Things Comprehensive construction are improving but we still have some distance news coverage We are still in a global recession that began to go. By contrast, the Book-to-Bill ratio in at the end of 2007. The World Bank forecast Japan in May was .40. The OECD reports that contemplates negative GDP change in OECD Insight, in-depth data and countries of -4.2 percent with a negative 4.8 leading indicators for most economies pointed industry analysis up or signified a trough in May 2009. The percent in non-OECD countries for the full year current recession has been more severe and 2009. Developing countries, which typically pervasive than the two previous ones. Job loss Commentary, Interviews have relatively high GDP growth rates, are in the United States and elsewhere far exceeds and much more! forecast to come in at only 1.2 percent in the experience of the last two downturns. In 2009. OECD countries are forecast to have a order to understand the reaction of the real modest recovery in 2010 with GDP growth of estate market to the broader economy we 1.2 percent. Some of the world’s more robust need to focus on job loss and job creation. economies have been hit hard. Korea recently Let us be your guide to the raised its GDP forecast from -2 percent to -1.5 Jobs and the Recovery world of Caribbean construction percent. Singapore has released a -4 percent to -6 percent GDP forecast and Brazil is forecast to Readers may recall talk of a “jobless recovery” www.cariconstruction.com be -1.1 percent. Only India and China of the BRIC in the early 2000s. In fact, all recoveries are Redefining the built environment For subscriptions or advertising please call 868 221 9366 or email RICS Property World | Fall 2009 5 sales@cariconstruction.com. RICS-PWFall09.indd 4-5 11/5/09 2:43 PM
  4. 4. Economic Overview Economic Overview simultaneously. Based on behavior by recent graduates, it also and dicing the paper into increasingly remote derivative claims. appears that there will be a meaningful pent-up demand for Since the ultimate buyers of those claims were comforted by apartment rentals that can only be unleashed by job creation. agency ratings that implied low risk, it appeared that a miracle had occurred and that risk was banished from the marketplace. The office sector has a modest over-capacity at present. Whether it Today the miracle of the disappearing risk has been debunked as gets worse before it improves will be determined by firms’ ability just another illusion. The expression of risk is found in the spread to retain their current staffing levels and remain viable. In the of required yields over Treasuries or Gilts or other putatively risk- United States, credit markets appear to be turning back toward free instruments. Transaction data from the past two quarters has begun to show a rise in both cap rates and spreads. I expect that we will Cap Rates again have a flat During the recovery from the 2001 recession, which was accompanied by a modest excess supply of real estate due to economic contraction, Real Capital Analytics reports that the bottom for an extended average cap rate for institutional transactions was 8.74 percent during the period January 2001 to December 2005. During the period as we enter a same period the average 10 year Treasury rate was 4.43 percent. The real estate cap rate spread averaged 430.7 basis points during that time. Why were spreads so high? Why was the real estate risk period of mixed results. premium nearly 100 percent of the Treasury yield? In the 1980s real estate cap rates had negative spreads to Treasuries. Why? Because investors assumed that the high inflation rates of the a semblance of normalcy with the exception of the possibility of period would be reflected in increasing revenues and values if they a CIT bankruptcy, which could have a major impact on several persisted. During the recovery from the 1990 recession, which was industries that rely on factoring and franchise finance. Expect the accompanied by market to remain weak for 18 to 24 months. Robust office markets a massive typically require vacancies to fall below 14 percent in the United excess States while several forecasters are estimating that vacancies will Months to Recover Peak Emplyment Bureau of Labor Statistics; Saltash Partners LLC; Establishment Data be approaching 17 percent by year-end. Of course, in individual markets the numbers vary widely with some moving into the mid- Figure 1: Recent Post-Recession Employment Recovery 20s already. But these numbers tend to be in traditional growth markets (with the exception of Detroit) that have shown the capacity to grow jobs at 5 percent to 7 percent per year in recoveries. The U.K. “jobless” as seen in figure 1, Recent Post-Recession Employment they anticipate. Even if so, it will take an extended period to make market looks to be in somewhat better shape in terms of the level of Recovery. It took 48 months to regain peak employment in the progress back toward the peak employment we saw last in 2007. vacancy but the relative importance of financial services in the City United States after the 2001 recession, until February of 2005. The I expect that we will again have a flat bottom for an extended and the West End could make for an extended recovery period. percent of job loss in the current recession has been significantly period as we enter a period of mixed results. Some will be rehiring sharper than it was in the 2001 recession, which bottomed at while others are still cutting. How does that affect real estate? The pieces are in place for a slow recovery in the jobs market, 97.9 percent of peak employment. As of June 2009, the United which means that real estate fundamentals will remain weak States had fallen to 95.3 percent of peak employment. It took There did not appear to be any significant capacity shortages in for an extended period and will embark on a slow recovery four years to replace those jobs in the 2001 recession; it will likely the property markets during the last expansion (with the possible when the job market begins to rise off its bottom. take much longer to recover this time. What does it mean for exception of hedge fund office space in Greenwich, Conn.). Thus, the property recovery will follow the jobs recovery. For now, How have the decline in fundamentals and changes in property markets? Figure 1 shows that the previous employment the office market remains weak in the United States, United the capital markets combined to affect values? The two recoveries follow a trend upward from a trough after “bumping Kingdom and elsewhere with rising vacancies and declining critical variables are risk premia and leverage ratios. along the bottom” for an extended period, about ten months in both cases. This recession is significantly different in both rents. Retail occupancies are suffering as well as retailers go dark Return of Risk the extent and the speed of job loss in the United States. in marginal locations or shut down entirely. Regional and super- regional malls are harder hit than in previous downturns while Risk premia have returned to asset pricing. During the Will the recovery resemble past history or not? Employment smaller shopping centers suffer as well. Given consumers’ new recent bubble, buyers made little distinction between the contraction is far more widespread this time around and that propensity to save in the face of asset deflation and reduced bluest of blue chip properties and those in historically may be something of a silver lining. Traditionally, firms take circumstances, retail will likely take substantial time to come back. volatile and risky markets. Why was that? Some would advantage of a recession to trim costs, remove deadwood and argue that it was because the investor was not bearing delay rehiring in the recovery as long as possible in order to Multi-family properties have seen increased weakness but on any risk. The lenders were taking it all. Yet the lenders’ a relative basis their fundamentals remain better than other © Photon75 restore their balance sheets. Given the sharp reduction in jobs, it rates did not reflect meaningful risk premia either. A is possible that firms will find they have a capacity problem early property types. Multi-family will also enjoy the earliest firming of cynic might note that the originating lenders were on in the recovery and that they must begin rehiring sooner than fundamentals as job creation brings household formation almost not bearing any risk either since they were slicing 6 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 7 RICS-PWFall09.indd 6-7 11/5/09 2:43 PM
  5. 5. Economic Overview Sustainability—Finance Toward Sustainable Finance: supply of finished product, cap rates traded between 9 percent Rising Cap Rate Scenario and 10 percent. Why? Because the specter of inflation had been banished by then. Investors priced property to reflect We have already seen a few transactions with markedly higher its inherent risk, returning to a spread roughly equal to the cap rates. They are likely to remain high if not go higher if space The Trouble with Asset Values Treasury rate. From early 1992 to the end of 2000, Treasuries market fundamentals remain weak and inflation remains dormant. traded between 5 percent and 6 percent. During 1998, Treasury Since we are in a balance sheet recession, it’s likely that deflationary rates pulled back into the 4 percent range and cap rates forces will remain at work in the short run. If so, we should expect followed, dipping into the 8 percent range — but bounced some continued decline in values as cap rates adjust upward to a back into the nines when Treasuries returned to the 5 percent new equilibrium in the 8 percent to 10 percent range. Realize that Dennis Webb, FRICS, argues for applying concepts of long-term sustainability to financial processes—essentially range in 1999. The failure of Long Term Capital and the the cap rate adjustment is occurring while fundamentals weaken telling the truth about value—as short-term asset valuation models continue to feed economic turmoil. and leverage declines — or disappears altogether in some sectors or markets. The combination is likely to bring value declines on It could take as many the order of 40 percent or more. Based on the institutional return indices in the United States and the United Kingdom, it appears as five years to regain that value declines on the order of 40 percent are a reasonable expectation and in fact have been booked in the case of publicly traded real estate securities. Coincidentally, a shift from a 6 the jobs lost to date. percent cap rate to 10 percent delivers a 40 percent decline in value for a constant income stream. While transaction volume has remained scant, the implications are clear for value. In the Asian crisis created a flight to the safety of Treasuries and real case of open-ended funds that are required to revalue quarterly, estate benefited as a result. But rates came back up in 1999 and already we see more than 30 percent declines in the past year. remained in the same range until 2002 when the Federal Reserve began its fight against the specter of deflation. Cap rates fell along While fundamentals will continue to weaken for some time, with Treasuries as liquidity flooded the world’s capital markets. The the shift in cap rates will create most of the revaluation. inevitable end to the property pricing bubble has come, evidenced © J Freeman Which will it be? first by a dramatic drop in transaction volume as investors avoided creating a reportable value against portfolios of higher book It likely will be both. Persistent high cap rates for a period of at values. Transactions have begun to come back, perhaps driven least 12 to 24 months, followed by cap rates falling on a relative by foreclosures or liquidations in pursuit of delivering. Recent cap basis to Treasuries. The initial phase of recovery will see few if any S rates have returned to the 9 percent and even the 10 percent level jobs created, thus investors will lack confidence that they will be ustainability as a concept is routinely applied create healthy perceptions of value in a big according to Real Capital Analytics. Where will they go next? able to fill empty space in the short run so they will rely on in-place to the natural world but routinely ignored way. The bad news is that adoption of anything revenue and be subject to reduced leverage opportunities. At some with respect to the financial environment. A that has tried to get in the way of what had There appear to be two possible paths for cap rates and point, however, the massive liquidity created by stimulus packages large portion of the population has developed been a very profitable false reality was wholly pricing in the next two to five years. What could drive them around the world will escape the liquidity trap and inflation will an awareness of conservation principles and resisted by existing institutions. The speed with back down and what could sustain them at elevated rates? come roaring back. Monetary policy response will lead to higher at least some respect for nature but financial which a clearly unstable system has imploded Falling Cap Rate Scenario reference rates from central bank actions or from investor pricing. beliefs are so embedded in our thinking that has been surprising, but so has the extent of we regard them as given, and have allowed global cooperation and the proliferation of A return of expectations for high inflation accompanied by It could take as many as five years to regain the jobs lost to date. institutions to develop based on (what are now new ideas. I am quite optimistic over the long improving fundamentals in space markets could combine to lower But expectations of a recovery will allow investors to look forward obviously) unsustainable premises. The oceans term, since there may now be an opening for cap rates dramatically on a relative basis. Recall that property traded to better cash flows. Investors have shown in previous cycles that are rising slowly but financial consequences are new understanding and a collective interest in at negative spreads to Treasuries during the high inflation years. they are willing to pay a small premium to have their assets in descending upon us at a frightening rate. telling the truth. There is hope for Capitalism II. We had reasonably sound fundamentals in most space markets portfolio when good times return. So after a period of persistently during those years so investors had a reasonable expectation of high cap rates investors will come back into the market in sufficient The root of both aspects of sustainability is Wages of conventional wisdom being able to raise revenues along with inflation. But remember volume to put downward pressure on cap rates and force them to short-term thinking. Our short-term notions of price inflation into their expectations rather than into the cap rate. asset value have fostered unreal perceptions Short-term notions of value have become that the nominal cap rates were low during that period only by of individual wealth and growth, and enabled embedded in our conventional wisdom, to contrast to the very high risk-free rates that failed to completely In each cycle, animal spirits rise to deny its very existence. Perhaps enormous financial distortions. Short-term the point that our collective belief system reflect expected inflation. Will the Treasuries and Exchequers of some memory of the current trauma will remain to inform our thinking creates a historic myopia and a kind regarding asset value has moved into a sort • the world have the discipline to head off incipient inflation from decisions during the coming recovery. of vacuum in which greed can have a field of fanciful parallel universe. This collective massive liquidity infusions? If we see a Japanese-style policy emerge day. Most recently, otherwise stable assets fantasy has fostered unreal perceptions of with long-lived low reference rates, we may see falling cap rates were allowed to enable extremely unstable individual wealth; one unfortunate, immediate again. Another enabler of falling cap rates was enjoyed in the Dr. Marc Louargand, FRICS, CRE derivative securities, with (by now) well-known consequence of which is the pain of foreclosure previous cycle — low interest rates accompanied by high loan- Principal implications for global financial markets. now being experienced by a great many to-value ratios. A 90 percent LTV at 5 percent interest means a 6 Saltash Partners LLC borrowers worldwide. The full measure of its percent cap rate yields 15 percent to the equity. The likelihood of Saltashpartners.com The good news is that we do have institutional consequences is far greater than foreclosures, this arrangement obtaining in the foreseeable future appears dim. marc@saltashpartners.com financial structures that can be adapted to however, as our collective sense of loss has 8 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 9 RICS-PWFall09.indd 8-9 11/5/09 2:43 PM
  6. 6. Sustainability—Finance Sustainability—Finance For example: What if a lender had made a single-family mortgage an institutional structure for countering the destabilizing effects of loan in 2005 based on a two-value appraisal? Say short-term frothy property markets. Its methods are an approximation for getting conditions support a current market value of $650,000, but also that at a long-term value, and have apparently worked quite well. MLV is this value demonstrates a divergence from the long-term trendline now included as part of International Valuation Standard 2, but has based on property type and market area, and another value was apparently not been adopted by any other countries or institutions. concluded at $400,000. The lender is now faced with a much more firm underwriting basis than with the $650,000 value alone. There Expanding the role of asset-level valuation are actually two collateral assets, one valued at $400,000 and one Existing risk-management tools are divorced to a large degree at $650,000 — $400,000 = $250,000 (hardly a small difference). from the underlying assets, making broad assumptions about A long-term loan can reasonably rely on the $400,000 value, and growth rates (6-8 percent into perpetuity?!), which have been its expected long-term growth rate. Of course, the growth rate known by valuers to be absurd. The problem is that apparently no could change, and the value could again be subject to short-term one (on Wall Street) thought to ask, confirming that conventional conditions at any future date. Nonetheless, the long-term based wisdom has been driving their myopic risk analyses. Recognition value would present less risk of loss than the short-term (current) of MLV, or some other standard that parses short- and long-term value. The $250,000 difference between the two is clearly a riskier perspectives, would provide a much more secure reliable foundation Year component of current asset value, and could be underwritten as such. for the higher-level tools used by institutional risk analysts. Figure 1: U.S. Inflation-Adjusted Home Prices What about the reverse situation? What is an appropriate price The current MLV standard makes a substantial effort to achieve long- reference when the market is temporarily depressed? What if the term values for income-producing properties, adjusting cap rates, long-term value is $400,000, but the market will only pay $280,000, rent levels etc., but so far appears to be less effective with respect to become enormous. Perceptions that were outrageously optimistic conditions, asset values can indeed be used to underpin long- due to oversupply or any number of other current, short-term single-family and other owner-occupied and non-income-producing have turned depressingly pessimistic, and what might have been term loans and investment, and these observations would argue conditions? The $120,000 below-trend value is also due to short- types. However, valuation technologies have continued to advance experienced as a normal return to a relative stable, long-term trend, for high ratings in their associated credit derivative instruments. term conditions. The lower value is meaningless in the long-term, since the standard was established and they could be brought to is instead being viewed with much hand-wringing and grief. but does reflect an impaired ability to sell now. A recovery to The short term is another story, as short term pricing is highly bear on the issue by the valuation profession. Such an analysis of $400,000 will occur at some point, although its timing is uncertain. Were individuals really richer, or was the experience guaranteed vulnerable to unexpected events. Unsustainable capital market the effect of time on value is currently in use for many property and The market may even fail entirely (as for certain types of bank-held to be fleeting? Did stable assets really become unstable? Were conditions and (local) natural disasters, to name just two, can ownership conditions. Examples include highly developed statistical derivative securities). It’s the ability of the holder to wait that gives the foundations of risk analysis realistic and appropriate? Much cause short-term pricing behavior to diverge considerably from methods (for examining and tracking broad markets), real estate the assets value under these conditions. This is not so different from of the blame for the collapse of the fanciful parallel universe the underlying long-term trend. Is short-term pricing a suitable damages (which demonstrate recovery to normal pricing levels various commonly-observed impairments, attributable to ownership is aimed at the entirely unexpected, widespread/systemic benchmark for long-term decisions? It still may be, so long as any over time), marketability impairments (risk of a forced hold) and (undivided interests held by two or more parties, for example), or nature of the decline in property values. However, a closer deviation from the long-term trend is identified and understood. The other methods. Valuers have the tools to parse between short- and physical impairments (such as toxic contamination). Impairments examination of asset pricing reveals that we have not been outsized risk exposure comes when deviations are not understood; long- term conditions, and deliver value opinions based on these are generally cured over time, with the property trading at less than telling ourselves the truth, and that a decline was inevitable. when short-term “frothy” pricing is used as evidence of market value premises. Of course, developing uniform methods and training its “stabilized” or long-term value during the impairment period. for long-term decisions. The reverse problem arises when prices (of programs will take some doing; but is there really an alternative? What is it with asset prices, anyway? property or derivative paper) are depressed, or when markets fail, It would make sense for valuers to go beyond their current/traditional Conclusions impairing the short-term market value of collateral. In either case, policing function, and parse their opinion into short- and long-term Real Property assets are among the most stable and least volatile the consequences of poorly understood asset values are not trivial. components. It does no good for valuers to bail out of opining The notion of financial stability should, by now, be ready for prime fixed assets over the long term, normally exhibiting a reasonably on such issues, on the basis that they should not be involved in time. The question is… Are we really committed to adopting a consistent historic trend over time. Even at present, a portion of Are valuers actually helpful? underwriting decisions. Valuers are the ones in a position to analyze long-term mindset? If so, someone needs to attend to the long- a property’s value is, indeed, quite stable; its long-term value is and understand what is and is not a stable and reliable value. This is term value trends if we are to a) substantially reduce the effects of reasonable predictable, and not strongly subject to unexpected What happened to the checks built into the property finance not a simple undertaking, to be sure, but an essential step toward unexpected events, b) provide some counterbalance to the positive events. However, another portion is more directly affected by system? One such check involves market-value appraisals. Did establishing popular and institutional awareness of sustainable value. feedback system which encourages both ever-escalating asset short-term (unsustainable) conditions, which can conspire to inflate banks and investors rely on appraisals? If so, did they help, hurt, or deflate value well beyond an expected range, and exposure to or do anything useful at all? Appraisals are generally intended to values on the one hand, and the collective malaise and liquidity The Germans are convinced unexpected events can become great. When this happens on a make sure that the collateral has sufficient value to support the impairments that depress values. If not the valuer (who has been wide scale—when short-term and long-term value components are loan, but the market value premise is only a snapshot in time. The Just such a method for appraising commercial property under generally marginalized into the role of policeman), then who? Who conflated and confused—a bubble or depression can begin to feed appraisal typically considers property, its local environment and conditions approximating the long-term was established in 1996 by really understands the assets? If we want to build a sustainable on itself. A positive feedback loop amplifies the value trend in both capital market conditions with reference to other (comparable) German Pfandbrief mortgage banks for collateral used with highly financial system, we may have less fun when bubbles begin to directions. Property owners experience themselves as unreasonably transactions and current investor (or home buyer) behavior. This rated covered bonds. Under this system, valuers provide opinions soar but will endure far less grief when they come back to earth. rich or poor, and derivative securities that are designed to rely on is largely a policing function, where a neutral party (valuer/ of “Mortgage Lending Value” (MLV), defined as: “The mortgage Continuing our historic myopia will not serve the sustainability property’s fundamental stability can become severely impaired. appraiser) offers an opinion of value that may or may not match value of a property is the value that can be expected with a high level needs that the future demands. I do believe that what will serve the transaction price. But assuming the transaction is consistent of surety, derived from the historic perspective of market events at us long term, as an achievable and maybe even transformational Unexpected events do not typically affect the long-term trend, as suggested by Robert Schiller’s inflation-adjusted home price with others… what if the entire market has been moved by the time of the valuation, on the basis of the durable characteristics, goal, is widespread understanding of the truth about value. • external conditions, such as easy money, lax lending standards, and and which will be achieved in normal property transactions over a index, shown in the chart for the postwar period. The aggregate Dennis A. Webb, ASA, MAI, FRICS other short-term conditions that have big pricing effects. What long period in the future.” The mortgage banks using this system of U.S. data shows that long-term values have been reasonably Primus Valuations good does it do the long-term lender to know that a transaction valuation may lend over the threshold allowed by a property’s MLV, stable; further, local market values for all property types normally Primusval.com price matches a market skewed by short-term conditions? but the excess cannot be used as security for covered bonds. Thus, a follow cycles that are reasonably well understood. Under such dwebb@primusval.com two-tier risk/cost structure for loans, which is exactly appropriate as 10 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 11 RICS-PWFall09.indd 10-11 11/5/09 2:43 PM
  7. 7. Art & Real Estate Art & Real Estate Site Specific Art: Where Real sales of similar properties are sought from appropriate markets prices on the secondary market for resale are very limited and where transactions involving similar items occur with regularity. prices are comparatively modest. However, the particulars of this commission made it a unique engagement and inspired the When it comes to site-specific art however, depending upon artists to undertake other projects on a monumental scale. Estate and the Art World Intersect the purpose of the valuation, it might be appropriate, indeed necessary, to consider also the Cost Approach. Value would be Site-specific commissions promote the possibility of working on based upon the cost of duplicating or re-creating an identical a hitherto unimagined scale, adapting and transferring work piece. When the method of construction or materials used is to different media, and enabling artists to reach large, new Beverly Schreiber Jacoby, FRICS, explains why site specific art must be valued not replicable, the artist is alive, approves and is willing to re-make an audiences on a daily basis. For example, another notable new MTA identical piece, the Cost Approach method should be considered. commission is Sol LeWitt’s work at the 59th Street-Columbus Circle only by its intrinsic qualities but on the merits of the location. Artists who specialize in large-scale and site-specific works may subway station. Entitled MTA Whirls and Twirls, the mural will not enjoy robust secondary markets if their practice consists consist of ribbons of color ceramic tiles traversing the entire south of permanent installations that may take months and years to wall (floor to ceiling) of the Intermediate Mezzanine Landing at the complete. As a result, there may be few appropriate comparables. transfer point between the IND and IRT Lines. Additionally, there will be two porcelain tile floors entitled Compass (57th Street) and Actually, the artist may not need to be alive for originals to be Compass (58th Street) on 57th and 58th Street mezzanines. The re-fabricated. Sol LeWitt (American, 1928-2007), the conceptual project is scheduled to be installed in 2009. Sandra Bloodworth, artist who stressed the idea behind his work over its execution, Director, Arts for Transit (MTA), noted that MTA commissions “are died in 2007, but during his lifetime his wall drawings were diverse in every way while upholding the goal of speaking to the executed by trained studio assistants. One of the motivating riding public. From emerging artists to very well-established artists, factors surrounding the long-term retrospective of LeWitt’s work in such as Roy Lichtenstein (42nd Street Station), the works are valued Adams, Mass., at Mass MoCA was the explicit intention that the accordingly.” The MTA self-insures, but its art is covered separately. large exhibition would facilitate the training of a new generation of executants to carry on with his practice. During medieval During the 1980s when New York City was a less safe and friendly and Renaissance times, when masters belonged to guilds and town, when there were few public art or other opportunities for academies, it was understood that the studio would continue to young artists to work on a monumental scale, Keith Haring (1958- work from the master’s models after his death. Therefore, the 1990) discovered that tarps, fences and walls worked as handy approach of LeWitt’s studio is not much of a departure from supports for large scale paintings. In 1987 he executed a joyous and centuries-old practices. For an artist of such renown, with a high-spirited mural on a cinderblock wall in a children’s community decades-long roster of public and private sales, researching center gymnasium on Pitt Street (Acrylic paint on cinderblock wall; price point data combined with estimating time and labor costs 20 x 20 feet; 6.10 x 6.10 m). “The Lower East Side Boys Club “MTA Whirls and Twirls” Compass (57th Street) and Compass (58th Street) (2009) Sol LeWitt, 59th Street-Columbus Circle, A, B, C, D, 1 lines, MTA New York City Transit. would enable one to arrive at a strong basis for valuation. Mural” was one of eleven public murals Haring executed during the Commissioned and owned by Metropolitan Transportation Authority Arts for Transit. 1980s in New York and around the world. The successful “rescue” Infrastructure, transportation and official projects in the United and removal of the intact, undamaged mural from the Lower East States often include commissioned, new public art work through Side Boys Club by professional riggers, conservators and gallerists I f the real estate world operates according when valuing the work, but there are many “Percent for Art” legislation and policies. For example, New York before the Pitt Street building was demolished in 2008 was widely to the truism “location, location, location,” factors to consider. The valuation process begins City’s Metropolitan Transit Authority (MTA) has applied a portion heralded in the media. Authenticated and supported by the Keith the same motto does not necessarily apply with questions such as: Is the work of art an of its Capital Program funds to commission permanent works Haring Estate and Foundation, “The Lower East Side Boys Club in the art world. This insight informs one of element of the structure or is it an independent of art as part of the rehabilitation of subway and commuter rail Mural” can be installed as a self-standing or structural wall and the key distinctions between valuing real and object? Is it possible for the work to exist and stations. Projects up to $20 million dollars budget one (1) percent; is ready to be transported world-wide, protected in a steel-casing. personal property. Exceptional circumstances retain its value in a different location? Can projects greater than $20 million dollars spend one-half (½) As Stuart Alan Levy, a private art dealer in New York, observed, “If apart, buildings and structures do not typically professionally removing it be accomplished percent. Tunnels, escalators and disability access components are an object is structurally sound, can be appreciated as a work of move; personal property, by definition, is without damage? How does the site or structure excluded from the formulae. Key to successful designs are sturdy art, and can be relocated to an appropriate alternate venue, there movable. At the intersection of these two contribute to the value of the object? Would the materials, such as mosaic, tile, or glass, as well as low maintenance shouldn’t be any loss of value because it is moved. It could end kinds of property is site-specific art. object lose value if removed from its site? Might costs and imagery pertinent to the location. A year ago MTA arts up in a location even more prestigious than it was originally.” it gain value, particularly if it becomes accessible managers initiated a pro-active program that calls for twice yearly The term, “site-specific” is, ironically, not to more viewers elsewhere? And, finally, does inspections and condition reports on more than 200 pieces installed Levy, a member of the Fund for Park Avenue Sculpture Committee, specific enough for a careful discussion. It the work impact the value of the real estate? throughout the system to identify and prioritize maintenance issues. which partners with the New York City Parks Public Art Program, is describes everything from new, commissioned familiar with site-specific pieces from participating on a committee work designed for a specific space initiated The next step in valuing these works is to Mega projects, such as the new $530 million dollar new South of citizens with art-related expertise that organizes temporary at the early planning stages, to a piece determine the method of valuation. When Ferry Terminal in lower Manhattan to replace the old one damaged installations of sculptures along the Park Avenue malls, or medians. acquired for a pre-existing or contemplated valuing fine art for donation, estate, gift, on 9/11, are showcases for new art. The terminal boasts floor- As with the MTA, it is imperative that materials are able to site. It can embellish, enhance or even disguise financial or insurance purposes, it is customary to-ceiling glass walls silhouetted by the outlines of trees titled withstand New York’s seasons. Size is also a constraint; sculptures architectural details or structural imperfections. to use the Comparative Market Data approach. “See it Split, See it Change” by Doug and Mike Starn (American, need to be at least fifteen feet tall to be visible during the milder Value is based upon past prices for similar 1955- ). Paid $1 million dollars for the four-year project, the weather when the trees on the malls are leafy. While the committee The relationship between the work and the works by the same artist, or similar works by artists acknowledged they lost money if labor and time were handles paperwork associated with permits and approvals from structure to which it is attached affects the art another artist of equal standing and related included. Experimenting with the properties of fused glass with various New York City bureaus and covers liability, other costs work’s value and, therefore, is a consideration reputation. Current and recent comparable their German fabricator took a year. The Starn twins’ auction 12 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 13 RICS-PWFall09.indd 12-13 11/5/09 2:43 PM

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